Fed’s emergency rate cut drags bond yields to all-time lows

Bond yields tumbled to record lows from Sydney to Seoul, reflecting a volatile mix of fear over the coronavirus fallout and rush for higher returns after Treasuries entered uncharted territory.

Yields for short-term debt in Australia and South Korea dropped almost 10 basis points on bets of more policy easing. Indonesia and Indian bonds, the region’s high yielders, also saw double-digit rate declines as a wider differential with Treasuries increased their attraction.

With 10-year US Treasury yields slipping below 1% for the first time, and a continued slide expected, a rout in Asia’s emerging market debt screeched to a rude stop. Indonesia, which last month saw its worst bond outflow since 2011, was the best example of a sudden pivot even if doubts persist.

“We are in an uncharted territory where US yields are at an all-time low, and dragging EM Asia yields along,” said Edward Ng, a money manager at Nikko Asset Management Asia Ltd. “While the levels are tempting for investors to fade the move, the timing isn’t the most assuring given that there is still much uncertainty over the extent of the virus outbreak in the rest of the world.”

For now, the Federal Reserve’s emergency rate cut of 50 basis points is pumping dollar liquidity into the market, emboldening some funds to take a bet on emerging market assets.

Yields on Indonesia’s benchmark 10-year bonds dropped by 25 basis points, the most since December 2016 on a closing basis. In India, they declined by as much as 13 basis points to levels not seen since 2016.

Inflation-adjusted 10-year yields across 23 emerging markets averaged 0.69% at the end of February, according to data compiled by Bloomberg. That gave them a 188 basis points advantage over developed markets, many of which are mired deeply in negative real rates.

Easing bets

“The Fed’s surprise inter-meeting cut has echoes of the 2008 global financial crisis, focusing minds on the severity of COVID-19’s rapid spread,” said Chang Wei Liang, macro strategist at DBS Bank in Singapore. “Asian central banks are likely to join in concurrent easing to mitigate risks from the global outbreak.”

Central banks in Australia and Malaysia cut rates on Tuesday ahead of the Fed, and speculation is rife that the Bank of Korea will follow suit after its governor held an emergency meeting with officials. The Reserve Bank of India has also said there’s room to ease as the nation reports its first cases of infection.

Overnight index swaps are now priced for the Reserve Bank of Australia to lower rates by another 25 basis points in April. Money markets indicate about an 80% chance of a 50 basis point cut by New Zealand this month. Even the Bank of Japan is now seen as leaning toward a cut by economists.

“A coordinated global central bank accommodation would create an asymmetric risk reward for owning duration assets,” said Jennifer Kusuma, senior Asia rates strategist at Australia & New Zealand Banking Group. It reduces risks on the currency front, which would support foreign inflows in some Asian bond markets, she said.

The rally in Asian debt has been matched by a surge in their currencies, with the Indonesian rupiah jumping 1.2% against the dollar in its biggest one-day advance in more than a year. Every emerging-market currency in the region advanced.

The question is “whether the virus could twist the short-end money markets further,” said Kang Seungwon, fixed income strategist at NH Investment & Securities. “Short-end bond markets are messed up and investors must bear in mind that this type of situation could be prolonged.”

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